June 08, 2020 Digital Feature

Uncertainty in Awarding Defendant’s Profits in Lanham Act Cases after Romag

Cate Elsten and Alexander Clemons

©2020. Published in Landslide, Vol. 12, No. 5, May/June 2020, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

The U.S. Supreme Court’s April 23, 2020, decision in Romag Fasteners, Inc. v. Fossil, Inc. found that willfulness should not be an “inflexible precondition” for awarding disgorgement of an infringer’s profits in a trademark case.1 The decision has become one of a very few from the Supreme Court providing guidance for monetary awards in trademark cases, whether before or after passage of the Lanham Act.2 What will—or should—the impact of this decision be on parties, attorneys, and damages experts approaching such cases? Obviously, for federal circuits that have tended to support Romag’s position, little or nothing will change. But what will change for U.S. district courts that have heretofore imposed willfulness as a necessary predicate to a disgorgement award? In many cases, we suspect the answer may still be “little or nothing.” Nor does Romag much improve consistency between federal circuits with respect to standards for disgorgement in trademark cases, as many other relevant issues remain unaddressed by the highest court.

The Lanham Act was passed in 1946.3 From at least that time through the 1980s, injunction was the preferred method of resolving trademark cases,4 and most courts required a finding of scienter (referred to variously as willful, intentional, or bad faith infringement) for any monetary award, whether plaintiff’s damages or defendant’s profits.5 In the wake of 1995’s Restatement (Third) of Unfair Competition, this requirement generally ceased to hold for awards of plaintiff’s actual damages/lost profits.6 In our experience since that time, this has held true in all federal circuits. While it is possible to discern the appellate courts as having split into camps as to a scienter requirement for disgorgement (First, Second, Ninth, and Tenth for; Third, Fourth, Fifth, Seventh, Eleventh, and D.C. against; Sixth and Eighth indeterminate),7 extensive reading of published cases reveals uneven progress toward this division and a tangle of rationales underlying similar outcomes even within a given circuit court.

Justice Gorsuch, delivering the opinion for the unanimous Court in Romag, noted the split between circuits, stating, “We took this case to resolve that dispute over the law’s demands.”8 The Court concluded that proof of willfulness is a consideration but not a requirement for disgorgement of an infringer’s profits: “[W]e do not doubt that a trademark defendant’s mental state is a highly important consideration in determining whether an award of profits is appropriate. But acknowledging that much is a far cry from insisting on the inflexible precondition to recovery Fossil advances.”9 Justices Alito, Breyer, and Kagan added: “The relevant authorities, particularly pre-Lanham Act case law, show that willfulness is a highly important consideration in awarding profits under § 1117(a), but not an absolute precondition.”10

Read expansively, this decision could be seen as the latest favoring the plaintiff’s ability to obtain a monetary award in trademark cases. Starting from a preference for injunction,11 the courts subsequently dispensed with a scienter requirement for recovery of plaintiff’s actual damages.12 In addition, the burden was placed on the defendant to prove both deductions from its sales to calculate profits and apportionment of those profits between infringing and noninfringing elements.13 In fact, a scienter requirement for awarding defendant’s profits was frequently justified by courts as a means of recognizing the difficulty of such apportionment and avoiding “draconian” or “windfall” awards.14 It is interesting that then D.C. Circuit Judge Clarence Thomas voiced this concern in ALPO Petfoods, Inc. v. Ralston Purina Co., stating that a finding of “willful, targeted wrongdoing” should be a prerequisite “for the severe and often cumbersome remedy of a profits award.”15 (Justice Thomas concurred without commentary in the Romag case.) Has the Court now universally removed the scienter requirement as well?

Not exactly, as noted by Justice Sotomayor, who observed that “the majority is agnostic about awarding profits for both ‘willful’ and innocent infringement as those terms have been understood”; she concurred “in the judgment only.”16 Justice Sotomayor further commented:

The majority suggests that courts of equity were just as likely to award profits for such “willful” infringement as they were for “innocent” infringement. But that does not reflect the weight of authority, which indicates that profits were hardly, if ever, awarded for innocent infringement. Nor would doing so seem to be consistent with longstanding equitable principles which, after all, seek to deprive only wrongdoers of their gains from misconduct. Thus, a district court’s award of profits for innocent or good-faith trademark infringement would not be consonant with the “principles of equity” referenced in § 1117(a) and reflected in the cases the majority cites.17

Thus, although the Court held that willfulness should not be a requirement for disgorgement, it clearly agreed that willfulness is still a critical consideration, while giving no opinion on its proper application. Romag is therefore not guaranteed to change end results at the circuit court level, given the importance of “principles of equity” to the determination of monetary awards under the Lanham Act.18 Although this may not have been the Court’s intent, its “agnosticism” could well leave room for bias to continue between circuits: those circuits that heretofore found willfulness an absolute prerequisite could still choose to more heavily weigh evidence of it in practice. In this respect, it must be remembered that—given that disgorgement is an equitable rather than a compensatory remedy—judges possess nearly unlimited rein to increase, decrease, or eliminate it.19

In arguing its case, Fossil warned that abrogation of the willfulness requirement would lead to “baseless” trademark litigation.20 We believe a more nuanced question may be whether Romag will result in an increase in trademark cases in which the plaintiff simply forgoes any attempt to claim actual damages and seeks only disgorgement. As noted earlier, the law already places a light burden on the plaintiff with respect to disgorgement calculations, requiring only a calculation of the defendant’s allegedly infringing sales. The burden rests on the defendant to prove deductions to reduce sales to profits and demonstrate what portion of these profits are due to use of the disputed mark rather than other, legitimate factors.21 If relieved of the scienter requirement, plaintiffs will find it easier to bring an inexpensive case for monetary award in a trademark case, but will not necessarily (or often) find it easier to bring a persuasive case. So long as scienter is still endorsed as an important consideration, in our experience prudent parties on both sides will address it where budget permits or exposure dictates.

Given the Court’s stated desire in Romag to resolve differences between the circuit courts with respect to awards of defendant’s profits, in the future it may well consider cases that address other such discrepancies. For example, uncertainty remains as to proper deductions from sales and apportionment of profits. While incremental profits22 are a virtually undisputed standard for calculating plaintiff’s lost profits, a number of methods of calculating defendant’s profits have been used by various courts.23 The Supreme Court might endorse one such method or, that failing, affirmatively state the method chosen should be considered not due to a financial or accounting imperative but as a matter of equity for the court to decide. Apportionment presents a more difficult issue and has at times been deemed “inherently impossible,”24 leaving the pre-Romag courts to either impose a scienter requirement, as discussed earlier, or pluck from available evidence a portion of profits that seems justified as an award “according to the circumstances of the case.”25 While presenting a less concrete dilemma than deductions, apportionment analyses could benefit from a court-determined standard framework, such as those found in the Georgia-Pacific or Panduit factors in patent law. Although disgorgement will remain an issue for the court’s discretion, resolution of these and other issues would greatly reduce the uncertainty to parties evaluating claims and exposure in Lanham Act cases.

Endnotes

1. No. 18-1233, 2020 WL 1942012, at *4 (U.S. Apr. 23, 2020).

2. The Romag decision appears to be limited to violations of Lanham Act § 1125(a).

3. 15 U.S.C. §§ 1051 et seq.

4. 5 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 30:1 (5th ed. 2019).

5. James M. Koelemay Jr., A Practical Guide to Monetary Relief in Trademark Infringement Cases, 85 Trademark Rep. 263, 267–68 (1995).

6. Id.; see Restatement (Third) of Unfair Competition § 36 cmts. g, j (Am. Law Inst. 1995) (“If the plaintiff proves pecuniary harm resulting from the defendant’s infringement or misrepresentation, damages should be recoverable even if the defendant acted in good faith, since the claim of an innocent plaintiff for compensation ordinarily outweighs any equities favoring the innocent wrongdoer.”).

7. 5 McCarthy, supra note 4, § 30:62.

8. Romag Fasteners, Inc. v. Fossil, Inc., No. 18-1233, 2020 WL 1942012, at *2 (U.S. Apr. 23, 2020).

9. Id. at *4.

10. Id.

11. 5 McCarthy, supra note 4, § 30:1.

12. Koelemay, supra note 5, at 267–68; see Restatement (Third) of Unfair Competition § 36 cmts. g, j (Am. Law Inst. 1995).

13. 15 U.S.C. § 1117(a) (“In assessing profits the plaintiff shall be required to prove defendant’s sales only; defendant must prove all elements of cost or deduction claimed.”); 5 McCarthy, supra note 4, §§ 30:65–:66.

14. Koelemay, supra note 5, at 269–70 (citing George Basch Co. v. Blue Coral, Inc., 968 F.2d 1532, 1540 (2d Cir. 1992)).

15. 913 F.2d 958, 961, 969 (D.C. Cir. 1990) (citing James M. Koelemay Jr., Monetary Relief for Trademark Infringement under the Lanham Act, 72 Trademark Rep. 458, 493–94, 536–37 (1982)).

16. Romag Fasteners, Inc. v. Fossil, Inc., No. 18-1233, 2020 WL 1942012, at *5 (U.S. Apr. 23, 2020).

17. Id. (citations omitted).

18. 15 U.S.C. § 1117(a) (“When a violation of any right of the registrant of a mark registered in the Patent and Trademark Office . . . shall have been established . . . , the plaintiff shall be entitled, subject to the provisions of sections 1111 and 1114 of this title, and subject to the principles of equity, to recover (1) defendant’s profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action.” (emphasis added)).

19. Id. (“If the court shall find that the amount of the recovery based on profits is either inadequate or excessive the court may in its discretion enter judgment for such sum as the court shall find to be just, according to the circumstances of the case.”).

20. Romag, 2020 WL 1942012, at *4.

21. 15 U.S.C. § 1117; 5 McCarthy, supra note 4, §§ 30:65–:66. Given the uncertainty under current law as to the appropriate way to compute the defendant’s profits, it is often advisable for the plaintiff or its damages expert to proactively address deductions, especially if there is any question as to whether the court will allow the plaintiff to present sur-rebuttal of the defendant’s calculation.

22. Sometimes referred to as “but for” profits, as they represent profits the plaintiff would have made but for the infringement.

23. Restatement (Third) of Unfair Competition § 37 cmt. h (Am. Law Inst. 1995); 5 McCarthy, supra note 4, § 30:68; Koelemay, supra note 5, at 287–89.

24. 5 McCarthy, supra note 4, § 30:65 (citing Hamilton-Brown Shoe Co. v. Wolf Bros. & Co., 240 U.S. 251, 261 (1916)).

25. Koelemay, supra note 5, at 293; see 15 U.S.C. § 1117.

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Cate Elsten is a managing director in Ocean Tomo’s expert testimony practice and is based in the firm’s San Francisco office. She provides business and intellectual property valuations, expert testimony in complex commercial litigation, and strategic and operational consulting.

Alexander Clemons a director in Ocean Tomo’s expert testimony practice and is based in the firm’s Chicago headquarters. He quantifies economic damages arising from intellectual property disputes and provides general litigation support.